title
AUTHORIZE MODIFICATIONS TO THE LOANS PROVIDED TO VISIONARY HOME BUILDERS OF CALIFORNIA FOR THE DIAMOND COVE TOWNHOMES LOCATED AT 5343 AND 5358 CARRINGTON CIRCLE
recommended action
RECOMMENDATION
It is recommended that the City Council by motion:
1. Authorize modifications to the loans provided to Visionary Home Builders of California for the Diamond Cove Townhomes to extend the terms of the loans, allow subordination to new financing, and allow the assumption of the loans by Carrington Circle Apartments, LP; and
2. Authorize the City Manager, or his designee, to execute all documents, including the Loan Modifications, Subordination Agreement, and Assignment and Assumption Agreement, and take actions necessary and appropriate to carry out the purpose and intent of the motion.
body
Summary
In 1999, the City of Stockton provided two HOME Investment Partnerships Program (HOME) loans totaling $1,443,825 (Attachment A - Resolutions 99-0206 and 99-0589) to Visionary Home Builders of California (then A.C.L.C.) to acquire and rehabilitate the Diamond Cove Townhomes, a 60 unit apartment complex located at 5343 and 5358 Carrington Circle (Attachment B - Vicinity Map). In 2009, an additional loan of $350,000 of Community Development Block Grant - Recovery (CDBG-R) (Attachment C - Resolution 09-0156) stimulus funds was provided to the project to repair water damage and install a vapor barrier to prevent further deterioration. Even though these previous rehabilitations have been completed, the buildings are now in need of a major renovation. To accomplish this, Visionary applied for, and was awarded, Low Income Housing Tax Credits. The project, which has a total development cost of approximately $9.9 million, will be funded with a private construction loan and the tax credit financing; no additional funding from the City is being provided. In order to close the new financing, Visionary has requested several changes to the City’s loans, including an extension of the loan term from 2029 to 2073 to match the tax credit term and meet certain tax credit requirements, the subordination of the City’s loans to new financing, and allowing Carrington Circle Apartments, LP, a new limited partnership of which Visionary is the managing general partner, to assume the City’s loans.
DISCUSSION
Background
Diamond Cove Townhomes is a 60 unit apartment complex located at 5343 and 5358 Carrington Circle which provides housing for low- and very-low income households. In 1999, the City provided two HOME loans totaling $1,443,825 to Visionary for the acquisition and rehabilitation of the complex. In April, 1999, an initial loan of $900,000 was provided for acquisition of the property (Attachment A - Resolution 99-0206) and in December, 1999, an additional loan of $543,825 was provided to fund the rehabilitation. The additional loan was approved by the adoption of the First Amendment to the Loan Agreement, (Attachment A - Resolution 99-0589), but the loan amount is not included in the resolution. In addition to the City’s loan, the initial rehabilitation project, which had a total development cost of approximately $4.3 million, received Low Income Housing Tax Credits and a construction loan which converted to a $950,000 permanent loan from the California Community Reinvestment Corporation (CCRC).
In 2009, the City approved an additional $350,000 loan to provide the funding to repair water damage that occurred in the units and to install a vapor barrier to prevent future deterioration. The loan was funded with CDBG-R funds, which were a one-time allocation of CDBG funds provided to the City through the American Recovery and Reinvestment Act of 2009. The City receives HOME and CDBG funds from the U.S. Department of Housing and Urban Development (HUD) to assist in the development of projects such as Diamond Cove Townhomes that serve low-income households.
The three loans provided by the City all expire on December 13, 2029. The original HOME loans were provided as thirty-year, one percent interest loans with annual payments from the Residual Receipts (or net cash flow, which is the amount remaining after operating costs are subtracted from all income). The CDBG-R loan is a twenty year, three percent interest loan with payments deferred until the end of the loan term. The current loan balance is $2,004,732, which consists of $1,740,149 in principal and $264,583 of interest.
The City’s loans currently are in second, third, and fifth lien position. The CCRC loan is in first position and a $240,000 Affordable Housing Program loan is in fourth position.
The Diamond Cove Townhomes are located in the Carrington Circle neighborhood, which is developed with approximately 30 duplexes and several apartment complexes. In the 1990’s, the area was in decline with many of the properties poorly managed and not properly maintained. Many properties were the subject of repeat code violations and gang-related problems. Due to the poor condition of the area, it was designated as a target neighborhood through the City’s Safe Neighborhood Program. The City partnered with Visionary and the revitalization efforts began with acquisition and rehabilitation of the Diamond Cove Townhomes. This was followed by loans to Visionary to acquire ten of the duplexes. A third project, the construction of a twenty unit apartment complex, also included a community center which houses a Head Start Child Development Center. The last project, which was completed in 2008, was the construction of another 21 unit apartment complex. Through these efforts, the entire neighborhood has been stabilized and the area now provides a safe, quality living environment for over 120 low-income households.
The Diamond Cove Townhomes includes a mix of two and four bedroom units and serves medium to large Low- and Very-Low Income families. In Stockton for a family of four to be considered Low-Income they must have an annual income below $47,700 and below $29,800 for Very Low-Income. The units provide large kitchens, separate dining and family rooms, and have space to allow tenants to have internal washers and dryers in addition to the two community laundry rooms. There is ample open space throughout the grounds to allow children to play within view of their home. There is also a community room on-site and residents have priority registration at the Head Start Child Development Center located within easy walking distance.
Present Situation
Diamond Cove Townhomes were built in the earlier 1980’s, making them approximately 35 years old. Even though the property has been rehabilitated, it is now in need of a major renovation to maintain the quality of the housing and help ensure its long-term sustainability. If a major renovation is not completed, the on-going maintenance and operating costs will affect the sustainability of the project.
The primary objective of the proposed rehabilitation is to ensure that Diamond Cove Townhomes remains a viable, affordable housing option for many years. The focus of the project is to:
1. Renovate the interior of the apartment units;
2. Implement energy efficiency upgrades; and
3. Upgrade accessibility by improving the accessible path of travel around the community and increase the number of accessible/adaptable units from three to six.
The proposed rehabilitation work will include replacing the original floor coverings, plumbing fixtures, appliances, and countertops in all of the units. Dishwashers will be added to the kitchens and unit exhaust fans will be added to the bathrooms. To improve the efficiency of the property and reduce on-going costs, the renovation will include replacing all metal windows, low efficiency water heaters, HVAC units and condensers, appliances and plumbing/ lighting fixtures with new upgraded items conforming to improve energy efficiency by 30% over the existing improvements. The exterior lighting will also be replaced for improved security and energy compliance.
There will also be some updates to the site, including tree removal to eliminate roots that are effecting the foundations of the buildings and a redesign of the landscaping to reduce water usage.
In order to fund the renovation, Visionary applied for Low Income Housing Tax Credits and in June 2015, were notified that the project had been awarded the credits. Diamond Cove Townhomes received points in the tax credit award process for having the City’s funds committed to the project. However, in order to receive these points, the City’s funds must remain part of the project for the duration of the tax credit regulatory period. The tax credit regulatory agreement is recorded approximately one year after the project is complete, which is anticipated to be June, 2017. Therefore, the tax credit regulatory period will expire in 2073. To meet the tax credit requirement, Visionary has requested that the City’s loan terms be extended from December 13, 2029 to December 13, 2073. If the extension of the loan term is approved, all of the requirements of the loan documents will remain in place until 2073 and the project will be obligated to provide housing affordable to low- and very-low income residents through the entire loan term.
The CDBG-R loan is currently payable in full upon the maturity date and the HOME loans are currently payable if funds are available from net cash flow (residual receipts). Visionary requests that both loans be payable pro rata from 50 percent of residual receipts. This is standard for tax credit transactions and is similar to the terms for previously approved City loans.
In addition to the extension of the loan terms and modification to the repayment terms, Visionary has also requested that the City subordinate to new financing, which will include a construction loan that is not anticipated to exceed $6.5 million and subsequently, a permanent loan which is expected to be approximately $1.5 million. The loan from CCRC which is currently in first position will be paid off, so the City’s loans will remain in the same lien position as they are in currently. The request that the City subordinate to other financing is typical for this type of project. Private lenders are not willing to provide financing if their loans are not in first position which allows them to recover their loan first in the event of a default and is something the City has agreed to for previous projects.
Lastly, Visionary has requested authorization for a new limited partnership to assume the City’s loans. A new limited partnership, Carrington Circle Apartments, LP, is being created for the project and, as with the former and current limited partnerships that have been created for this project, Visionary will remain part of the ownership entity as the sole member of the managing general partner. Carrington Circle Apartments, LP will assume all the obligations and requirements of the City’s loans.
Since affordable housing projects must operate in a different way than market rate projects, the type of renovation currently being proposed must be accomplished differently than it would at a market complex. In affordable housing, the initial rents are low and they do not benefit from periodic increases which occur in market-rate housing, thereby limiting the amount of cash flow generated by the affordable housing. While funds are set aside for maintenance, in order to update and upgrade affordable communities, it becomes necessary to obtain other funding, such as Low Income Housing Tax Credits, and perform the improvements all at once in a major rehabilitation project like the one currently proposed for the Diamond Cove Townhouses. Similar projects may be needed in the future, but are necessary to maintain the City’s previous investment and to maintain the affordable housing that exists in the community.
The proposed rehabilitation project will result in several benefits for the residents of Stockton. The project will help maintain the City’s affordable housing stock in quality condition, will help continue to stabilize a neighborhood that the City has invested in significantly, and will include energy efficiency upgrades which will reduce the on-going costs of operating and living in the complex. The rehabilitation is also being accomplished with funds provided by non-City sources, including State and private financing, so it is bringing dollars into the community. So while it is extending the date when the City’s loans are due, the proposed project will allow Diamond Cove Townhomes to continue to provide quality housing to the households that are intended to be served by the HOME and CDBG funds that the City receives from HUD.
FINANCIAL SUMMARY
The original loans were funded entirely with federal HOME and CDBG-R funds; there were no general fund dollars associated with the loans and no additional funds are being loaned for the current rehabilitation project.
The current balance of the City’s three loans to the Diamond Cove Townhomes project is $2,004,732, which consists of $1,740,149 in principal and $264,583 of interest. The City’s loans are currently in second, third, and fifth lien position. The $950,000 construction loan from CCRC is in first position and a $240,000 Affordable Housing Program loan is in fourth position.
If the requested subordination is approved, the City’s loans will remain in the same position, but the amount of the loan in first position will increase. During the rehabilitation, the City’s loans will be subordinate to a construction loan which is not anticipated to exceed $6.5 million and subsequently, the construction loan will be replaced with a permanent loan which is expected to be approximately $1.5 million.
The City’s loans all currently expire on December 13, 2029. The requested extension would extend the loan terms to 2073. While this will extend the date when the loan is due in full, when funds are available, annual payments will be made to the City from the residual receipts.
Attachment A - Resolutions 99-0206 and 99-0589
Attachment B - Vicinity Map
Attachment C - Resolution 09-0156
Attachment D - Amended and Restated HOME Loan Agreement
Attachment E - Amendment to CDBG-R Loan
Attachment F - Subordination Agreement
Attachment G - Assignment and Assumption Agreement HOME
Attachment H - Assignment and Assumption Agreement CDBG-R